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Chesapeake Energy raises doubt over its ability to survive

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Via Financial Times

Chesapeake Energy, a highly indebted prime mover of the US shale gas boom, has warned that it may not survive if low commodity prices persist into 2020.

The acknowledgment pummeled the company’s shares and bonds on Tuesday and underlined the straitened circumstances of US shale drillers, which despite soaring output have lost much of their access to financing to sustain operations.

Under late co-founder Aubrey McClendon, Chesapeake rose from obscurity to become for a time the second-largest gas producer in the US, after ExxonMobil. The company expanded by using money from banks and investors while it outspent its cash flow.

Doug Lawler, chief executive since 2013, has aimed to improve financial discipline. Yet record oil and gas production in the US has helped to drive down prices for the commodities, with the US crude benchmark at $57 a barrel and natural gas prices depressed below $3 per million British thermal units, making it more difficult for Chesapeake to repay lingering debt.

Chesapeake had $9.1bn of net debt on the books in September, almost four times its equity market value. The company warned in a securities filing that if current oil and gas prices “persist or decline throughout 2020”, it would put the company at risk of breaking a covenant to a revolving loan “and may cause doubt about our ability to continue as a going concern”.

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The disclosure comes as bankruptcies tick up in the US oil patch, with 33 in the year to September 30, according to Haynes and Boone, a law firm. Chesapeake, with oil and gas acreage in states as diverse as Pennsylvania, Texas and Wyoming, reported a third-quarter adjusted net loss of $188m, or 11 cents a share. Total production fell 11 per cent year on year to 478,000 barrels a day on an oil-equivalent basis.

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Shares of Chesapeake fell 15 per cent to $1.32 in early afternoon trading on Tuesday. The company’s bonds issued at the start of 2018 and maturing in 2027 fell roughly 8 cents to a new low of 59.3 cents on the dollar. Another bond, issued at the same time but maturing in 2025, fell 7 cents to 63.4 cents on the dollar.

“This is what makes markets nervous,” said David Norris, head of US credit at TwentyFour Asset Management, “particularly in the energy space, where the majority of defaults this year have been.”

Chesapeake said it would cut capital spending by 30 per cent in 2020 to about $1.3bn-$1.6bn in an effort to reduce debt and avoid triggering the covenant.

“We’ve been keenly focused on absolute debt reduction, and we’ve made great strides,” Domenic Dell’Osso, chief financial officer, told analysts. “We expect to continue to make strides using all the same levers that we have: cost discipline in all aspects of our business, asset sales, hedging prices as they rise, capital markets transactions and, of course, working very closely with our bank group, which we do on a regular basis.”

He added that Chesapeake “could go out and seek a waiver at any time from our bank group. But at the moment, we continue to be focused on the strategic levers that result in permanent debt reduction.”

Additional reporting by Joe Rennison in New York

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